Google misses as costs climb on bet that economic recovery will continue

After the market close on July 15 Google reported second quarter earnings of $6.45 a share. That was worse than the $6.52 Wall Street analysts had projected. The stock dropped 4.2% or $20.62 in after hours trading to $473.40.

The problem wasn’t revenue—which is good news for the U.S. (and global economy) since most of Google’s revenue comes from advertising and higher revenue means more advertisers are buying ads. Revenue climbed to $5.09 billion, up 25% from the second quarter of 2009. Analysts had forecast revenue of $4.99 billion.

Not only were more advertisers buying ads, but more people were clicking on them—another sign of healthy economic activity. The number of revenue-generating clicks on Google ads climbed 15% in the quarter from the second quarter of 2009.

And advertisers were willing to pay more for them. —the average price per ad click rose by 4% from the second quarter of 2009. (Although that 4% growth rate is lower than the growth rate in the first quarter of 2010 and the last quarter of 2009.

But rising operating costs at Google turned that revenue growth into slightly disappointing earnings. Google added 1,100 employees in the quarter. The company's also spent $476 million on capital expenditures including data centers. That was more than three times the capital spending in the second quarter of 2009.

That probably wouldn’t have hurt the stock quite so badly except that the increase in expenses followed quarters where Google had worked hard to cut costs in response to Wall Street worries that the company, like many fast growing companies, had lost control of spending.

Google’s management has argued that now is the time to expand since the U.S. economy is on the rebound. But as we know from watching stocks struggle after hitting a high on April 23 Wall Street isn’t convinced that the U.S. economy isn’t going to slow more than Google now seems to expect.